Business context and reporting period
First Solar, Inc. designs and manufactures solar modules and develops, constructs, sells, and services photovoltaic power systems. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; comparisons are with the same 2013 periods. Results reflect two segments: Components and Systems.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $544.4m | $519.8m | $1,494.5m | $1,275.0m |
| Gross profit / margin | $92.7m / 17.0% | $140.1m / 27.0% | $329.4m / 22.0% | $309.4m / 24.3% |
| Operating income | $1.9m | $39.1m | $141.2m | $100.3m |
| Net income | $4.5m | $33.6m | $116.5m | $92.7m |
| Diluted EPS | $0.04 | $0.37 | $1.14 | $1.03 |
- Q2 sales rose 5%, primarily on higher Systems project revenue, including full profit recognition on the 50 MW Macho Springs project. Six-month sales rose 17%, driven by Systems projects including Campo Verde and Macho Springs.
- Q2 gross margin fell 10 percentage points, reflecting lower-margin project mix and lower module selling prices; manufacturing utilization and cost improvements partly offset the decline. Six-month margin fell 2.3 points.
- Systems accounted for $350.3m of Q2 sales and $983.6m for six months. Third-party solar module revenue fell 20% in Q2 and 61% for six months; management cited lower average selling prices and, for the six-month period, lower sales volume.
- Components reported pre-tax losses of $44.6m for Q2 and $74.0m for six months; Systems reported pre-tax income of $46.9m and $217.2m, respectively.
At June 30, 2014, cash and cash equivalents were $851.3m and marketable securities were $497.5m, a combined $1,348.9m, down from $1,764.2m at year-end 2013. Restricted cash and investments were an additional $370.6m, including funds restricted for module recycling. Total debt was $194.7m, including $60.8m current; the revolving facility had no borrowings, $473.7m availability after letters of credit, and the company reported covenant compliance. Current assets were $3,170.3m and current liabilities $1,211.2m.
Operating cash flow was negative $199.8m for the first six months, versus positive $288.8m a year earlier. Investing cash outflow was $249.8m and financing cash outflow $26.7m; cash declined $473.7m. The company attributed weaker operating cash flow mainly to lower customer receipts and working-capital movements, including higher receivables and lower accrued liabilities.
Material changes versus the prior period
- Systems growth lifted total sales, but lower project margins and falling module prices sharply reduced Q2 gross profit and operating income.
- Six-month net income increased 26%, despite lower gross margin, while Q2 net income declined substantially year over year.
- Cash and marketable securities fell by $415.3m from December 31, 2013; total debt declined from $223.3m to $194.7m.
- Solar power system revenue rose to 88% of Q2 sales and 93% of six-month sales, as module-only sales decreased.
Outlook, commentary, and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected 2014 module production of approximately 1.8 GW; 0.8 GW had been produced in the first half. It expected $185m–$235m of capital expenditures in the second half.
- As of August 5, the advanced-stage Systems pipeline was approximately 4.0 GW, including about 2.6 GW sold or under contract. Management estimated approximately $3.7bn of remaining revenue on the sold/contracted pipeline, largely expected through project completion or closing. Project timing and revenue recognition can be uneven.
- Management said cash, marketable securities, operating cash flows, and available credit were expected to meet working-capital and capital expenditure needs for at least 12 months. Systems development and construction require substantial upfront working capital; the net investment in projects and related deferred balances was approximately $761.6m.
- Risks include persistent industry capacity oversupply and pricing pressure, competition and margin compression, project construction, permitting, financing and sale delays, and estimates used in percentage-of-completion revenue recognition. Some strategic-market offerings may be priced at minimal gross margins.
- Product warranty liabilities were $210.8m; a 1% change in the estimated warranty return rate would change the liability by approximately $59.1m. Module collection and recycling liabilities were $250.0m; a 1% increase in the annualized inflation assumption would increase that liability by $61.9m.
- A securities class action had been certified, with merits discovery ongoing; the company said it could not estimate potential loss. Related derivative actions were stayed or inactive, and potential loss was likewise not estimable. The company also disclosed tax audits and ordinary-course legal matters.
- Q2 included a $20.7m investment tax credit generated by a project placed in service and a write-off of an equity investment contributing to other expense. Management reported no additional expense in the first half for the voluntary remediation program relating to certain older modules.
Key facts for investors to verify
- Whether Systems project completions, sales, and collections convert the reported pipeline and receivables into revenue and cash on schedule.
- Whether gross margins recover as project mix changes and module pricing, manufacturing costs, and utilization evolve.
- Cash generation, working-capital needs, second-half capital expenditures, and continued compliance with credit-facility covenants.
- The assumptions and sensitivities underlying warranty and recycling liabilities, and any changes to remediation estimates.
- Developments in the securities and derivative litigation, tax examinations, and contingent project or acquisition obligations.